Economic Value of Skills

The economic value of skills
Skills that pay the bills
Jan 7th 2014, 17:16 by C.W. | LONDON

HOW well are your skills rewarded? There is surprisingly little research on that question, and what does exist is pretty much entirely focused on America. A new paper* from the OECD, a rich-country think-tank, tries to fill this gap.

The research uses survey data from the Programme for the International Assessment of Adult Competencies (PIAAC), released only a few months ago. The database is a big improvement on what has come before: not only does it look at people of all ages but the sample size is large. Over 150,000 people in 24 countries were interviewed: respondents were given numerical, literacy and problem-solving tests. (The results were then standardised on a 500-point scale.) The same survey asked people about their work.

The raw results of the PIAAC survey are fascinating. South Korean high-school graduates have better numeracy and literacy skills than Italian university graduates. Younger folk in Finland do substantially better than their elders.

Overall, the effect of skills on earnings (what economists call “returns-to-skills”) is unsurprising. The authors focus on numeracy and show that people with more skills earn more. A one-standard-deviation increase in numeracy skills is associated with an 18% wage increase among “prime-age” workers (workers between 25 and 54).

But there is massive variation in returns-to-skills:

Why? The authors conduct a series of regressions and, some would argue, show the limitations of social-democratic policies:

[R]eturns to skills are systematically lower in countries with higher union density, stricter employment protection, and larger public-sector shares.
The analysis shows, for example, that a 25% point increase in union density (the difference, say, between Belgium and the United Kingdom) leads to a 3.5% point lower wage increase for each one-standard-deviation increase in numeracy skills.

But free-market types should not gloat. Pretty much unexplored in the paper is the question of whether high returns-to-skills are a good thing. Highly skilled people might simply be extracting “rents”—economists’ shorthand for earning more than they would need to continue doing what they are doing. And when the skilled do extremely well, dystopian predictions like those discussed by Tyler Cowen in a recent book are never far away.